Tax blow for furnished holiday lettings
© Adobe Stock From April 2025, farming businesses running furnished holiday lets (FHLs) will lose their significant tax advantages.
The Labour government has picked up the previous regime’s plan, originally announced alongside the Spring Budget 2024, to abolish benefits relating to capital gains tax (CGT), loan interest, capital allowances and pension contributions.
The move was originally promoted as being designed to ease the housing shortage by bringing more residential property onto the market and to encourage the sale of second homes. However, it did not make it into law before the general election.
See also: Plan now for removal of furnished holiday let tax advantages
After repeal, former FHLs will form part of a person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses, HMRC announced this week.
The change means these businesses will lose eligibility for business asset disposal relief (BADR), which fixes CGT at a 10% rate on qualifying capital gains when an FHL is sold or gifted, with an individual lifetime allowance of £1m.
At the time of the previous government’s announcement of the FHL changes, accountant Hazlewoods calculated that, at current CGT rates, this saves couples with no other BADR qualifying assets up to £280,000.
CLA criticises move
The Country Land and Business Association (CLA) has criticised the FHL changes as punishing local economies and rural businesses for diversifying.
The organisation called for far closer scrutiny of the perceived problem than the “sweeping approach” being taken needs.
CLA president Victoria Vyvyan said: “For many farmers and landowners, diversification into the holiday lettings market is a business necessity.
“The short-term rental and holiday let sector contributes billions to the wider economy, supporting local shops and restaurants and creating tens of thousands of jobs.”
Strict rules will prevent a tax advantage being gained through the use of unconditional contracts to obtain CGT relief under the current FHL rules, and this applies from 6 March 2024.
Limited transitional rules will ease the financial hit in some cases.
Main changes to FHL tax regime from April 2025
- Loan interest chargeable against business expenses will be reduced
- Capital allowances for new expenditure and replacement of domestic items will be axed
- Capital gains tax on FHL sales will no longer be eligible for rollover relief and, from 6 April 2025, sales of FHLs will be taxed at standard residential property CGT rates – currently 18% for basic rate taxpayers and 24% for those on higher rate tax, although the forthcoming October Budget may alter these rates
- FHL income will no longer be allowed to count within relevant UK earnings for pension tax relief